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One state adds a 7 percent sales tax to the price of most [#permalink]
05 Aug 2009, 06:13
50% (02:46) correct
50% (03:34) wrong based on 4 sessions
One state adds a 7 percent sales tax to the price of most products purchased within its jurisdiction. This tax, therefore, if viewed as tax on income, has the reverse effect of the federal income tax: the lower the income, the higher the annual percentage rate at which the income is taxed. The conclusion above would be properly drawn if which of the following were assumed as a premise? (A) The amount of money citizens spend on products subject to the state tax tends to be equal across income levels. (B) The federal income tax favors citizens with high incomes, whereas the state sales tax favors citizens with low incomes. (C) Citizens with low annual incomes can afford to pay a relatively higher percentage of their incomes in state sales tax, since their federal income tax is relatively low. (D) The lower a state’s sales tax, the more it will tend to redistribute income from the more affluent citizens to the rest of society. (E) Citizens who fail to earn federally taxable income are also exempt from the state sales tax.
Reason: Federal tax is based on your income but this new state tax is based on spending. Basic need products are same for both high income and low income earners and even one earns less but need to pay same tax, which is just opposite of Federal tax policy.
A for me as well. the conclusion stands only if spending is the same amount (not percentage) across the board, then lower income families is taxed at a higher rate, which is the opposite of the federal tax
A progressive tax makes lower income citizens pay less tax. If all citizen spend the same amounts, everyone will be paying the same tax, which would mean that lower income citizens are paying a larger % of their income that higher income citizens.
I think this question is very difficult to anyone who does not have any pre-exposure to tax theory. The text does not clue you in to the rationale that's going on. I happen to be a CPA so this was easy for me.